ProfessorBainbridge.com

A tweet to the Business Roundtable re the law of corporate purpose

Memo to the @BizRoundtable: You don't get to "redefine" anything. Only the Delaware courts can change the law of corporate purpose. And, as you ought to know, Delaware comes down square on the side of shareholder wealth maximization. https://t.co/brym193M3U #BizRoundtable https://t.co/QHVpkG8rE6

— Professor Bainbridge (@ProfBainbridge) August 19, 2019

The Politics of Corporate Law

The political context in which corporate law is made is all too often ignored. Manabu Matsunaka has an interesting post on some recent scholarship, including his own work, on the subject:

Culpepper argues in his book Quiet Politics and Business Power: Corporate Control in Europe and Japan that salience of an issue (the extent to which a political issue draws the electorate's attention) determines whether politicians intervene in corporate law making When the salience of an issue is high, politicians act. Otherwise, they leave the issue to specialists. On the other hand, Cioffi and Höpner argue that center-left parties play a critical role in pro-shareholder reforms in their paper and in Cioffi’s monograph.

Still, the best thing I ever read on the politics of corporate law is Roberta Romano's Metapolitics and Corporate Law Reform, 36 Stanford Law Review 923 (1984).

Robert Anderson's Property Theory of Corporate Law

Robert Anderson at CLS Blue Shy Blog (editorial footnotes my own):

In a recent article, I develop a theory of the corporation as a legal entity based upon the foundation of property law, which I call a “property theory of corporate law.” This theory, unlike the contractarian perspective on the corporation, is capable of demarcating the distinctive features of corporate law from other contractual features.

In current legal scholarship, the dominant[1]view of the corporation is contractarian, one that sees the corporation as a nexus of contracts among factors of production. …

The contractarian perspective has profoundly influenced scholarly and judicial thinking on the corporation as a legal entity.[2]…

Yet the contractarian view fails to explain even the most fundamental and important aspects of shareholders’ relationships to the corporation, such as the mandatory rules of corporate law and fiduciary duties. 

I don’t buy either criticism. As for mandatory rules, it is true that “Contractarians contend that corporate law is generally comprised of default rules, from which shareholders are free to depart, rather than mandatory rules. As a normative matter, contractarians argue that this is just as it should be.” Stephen M. Bainbridge, Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship, 82 Cornell L. Rev. 856, 860 (1997).

It is also true that mandatory rules pervade corporate law. But this observation “is far from fatal. In the first instance, most contractarians probably regard the theory's normative claim as being the more important of the two. As such, we cheerfully concede the existence of mandatory rules, while deploring that unfortunate fact. In the second, … many mandatory corporate law rules are trivial in nature. Finally, nontrivial mandatory rules are often subject to evasion by choice of form and jurisdiction.” Id. at 860-61.

“Under the contractarian model, fiduciary duties are gapfillers by which courts resolve disputes arising out of cracks in incomplete contracts.” Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U.L. Rev. 547, 586 (2003). See generally Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 90-93 (1991) (explaining that corporate law fiduciary duties should be understood as gap-fillers designed to plug holes in the inherently incomplete contract between the corporation and shareholders).

The role and nature of fiduciary duties in the contractarian theory of the firm was developed in an important series of articles, Ian Ayres and his collaborators, which argued that majoritarian defaults are not always desirable, even if a potentially dominant one can be identified. E.g., Ian Ayres, Making a Difference: The Contractual Contributions of Easterbrook and Fischel, 59 U. CHI. L. REV. 1391 (1992); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87 (1989); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995).

Among the alternative, non-majoritarian defaults they identify, the most relevant for our purposes are tailored defaults, muddy defaults, and penalty defaults. Fiduciary duties are an excellent example of a case in which muddy defaults are both appropriate and necessary. Stephen M. Bainbridge, Contractarianism in the Business Associations Classroom: Kovacik v. Reed and the Allocation of Capital Losses in Service Partnerships, 34 Ga. L. Rev. 631, 668 (2000).

In addition, Robert asserts that “the property theory argues that there are legal boundaries of the corporation.” I’m not heavily invested in the debate over the boundaries of the firm, so I’ll throw this one over to my friend and co-author Bill Klein:

In many modern ventures with dispersed claims and control it becomes futile to try to map out the boundaries of the firm or to apply traditional corporate law labels or concepts. Whether any particular firm is closer to the internet company or to the traditional, large hierarchical corporate structure is, of course, simply a question of fact. It is worth noting, however, that even General Motors and Ford Motor Company, which are often thought of as paradigms of the traditional hierarchical structure, have nontraditional equity structures and have restructured operations in such a way that the boundaries of the firms are no longer clearly demarcated. At an extreme, these boundaryless structures are often referred to as “virtual.”

Mitu Gulati et. al., Connected Contracts, 47 UCLA L. Rev. 887, 896–97 (2000).

Having said all that, I still think this is a very valuable contribution to the literature. Robert's critique called to mind a point I made some years ago:

Elegant and parsimonious models ... are more important for economists than for lawyers.Situation-specific mini-theories of behavior thus may be more useful for making legal decisions than a single unified theory like the traditional rational choice model.

Stephen M. Bainbridge, Why A Board? Group Decisionmaking in Corporate Governance, 55 Vand. L. Rev. 1, 55 (2002).

Similarly, it strikes me that the search for a unified field theory of the firm is unhelpful. Instead, much more useful is having a toolbox full of situation-specific mini-theories of the firm. If so, the interesting questions trying to determine what domains are best allocated to specific theories. See, e.g.,Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U.L. Rev. 547, 596 (2003) (comparing the domains within which director primacy and team production models are useful).

Even if Robert does not convince us that he has come up with a unified field theory of the firm, he has convincingly suggested that property theory is a valid and useful situation-specific mini-theory.

Three open questions about California's Board of Directors Gender Quota Law

Keith Paul Bishop poses, but does not answer them.

Yours truly cited in a case involving right of refusal transfer restrictions in close corporations

The Westlaw headnote in Minority Dewey v. Bechthold, 18-CV-1739-JPS, 2019 WL 2193865 (E.D. Wis. May 21, 2019), explains:

Background: Minority shareholders of several closely held corporations and various related trusts and beneficiaries brought action against majority shareholders and corporations, alleging fraud and violations of Wisconsin state law in connection with their rights as shareholders, and seeking declaratory judgment that creation of transfer restriction on shares gave majority shareholders the ability to manipulate the books to force minority stockholders to sell their shares to the controllers at an artificially-depressed price, which rendered right-of-refusal provision in transfer restriction unreasonable and unenforceable as a matter of law. Defendants moved to dismiss for failure to state a claim. ...

Holdings: The District Court, J.P. Stadtmueller, J., held that: ... 

2 transfer restriction was not invalid, unreasonable, or unenforceable;

In support of that holding, the Court explained that:

Wis. Stat. § 180.0627(4)(a) permits right-of-refusal transfer restrictions that “obligate the shareholder...first to offer the corporation or other persons, whether separately, consecutively or simultaneously, an opportunity to acquire the restricted shares.” Most courts in Wisconsin (and throughout the country) uphold these restrictions if they are “reasonable” and if the party against whom the restriction is asserted had notice of the restriction. Allen v. Biltmore Tissue Corp., 2 N.Y.2d 534, 161 N.Y.S.2d 418, 141 N.E.2d 812, 816 (N.Y. Ct. App. 1957); Bruns v. Rennebohm Drug Stores, 151 Wis.2d 88, 442 N.W.2d 591, 596 (Wis. Ct. App. 1989) (acknowledging that “close corporations have a special need to control the number and character of shareholders”); Casper v. Kalt-Zimmers Mfg. Co., 159 Wis. 517, 149 N.W. 754, 756 (Wis. 1914) (noting that right-of-refusal restrictions reflect sound business policy).2 However, “if the by-law under consideration were to be construed as rendering the sale of the stock impossible to anyone except to the corporation at whatever price it wished to pay, we would, of course, strike it down as illegal.” Allen, 161 N.Y.S.2d 418, 141 N.E.2d at 816. Although Wisconsin courts routinely uphold these types of provisions, some courts have held that rights-of-refusal should be narrowly construed. Frandsen v. Jensen-Sundquist Agency, Inc., 802 F.2d 941, 945–46 (7th Cir. 1986) (applying Wisconsin law and holding that a right-of-refusal is not triggered by a merger). Finally, it is worth noting that there is no legally mandated option price. Rather, the option price is set at the discretion of the corporation. See Nichols Constr. Corp. v. St. Clair, 708 F. Supp. 768, 771 (M.D. La. 1989), aff'd mem., 898 F.2d 150 (5th Cir. 1990) (holding that “the mere failure to pay ‘fair value’ for stock under a stock redemption agreement” is not “fraud or breach of fiduciary duty.”); F.B.I. Farms, Inc. v. Moore, 798 N.E.2d 440, 448 (Ind. 2003) (“to the extent that restriction devalues the shares in the hands of any individual shareholder by reason of lack of transferability, it is the result of the bargain they struck”); see also Stephen M. Bainbridge, Corporate Law, § 14.2 (3d ed. 2015) (explaining the aforesaid and noting that, where a right-of-refusal provision is in place, even option prices set at fair market value will be dramatically discounted by potential third party purchasers to account for the bargain's low likelihood of success).

Commissioner Hester Peirce Has Concerns About California's Gender Quota Mandate

Keith Paul Bishop reports on Commissioner Pierce's comments to the Society for Corporate Governance:

The text of the bill explicitly makes a business case to justify the law’s existence; it points to the financial benefits to firms of having women on their boards.  As I noted earlier, the mixed findings of research in this area may not support this business case.

These state efforts concern me because they micromanage an aspect of corporate governance that corporations, boards, and shareholders seem perfectly capable of handling on their own.

The full text of Commissioner Pierce's speech is here. Oddly, the Commissioner failed to cite my work on the subject.

The difference between "publicly held" and "publicly traded"

Keith Paul Bishop explains

Twitter bids farewell to Delaware Chief Justice Leo Strine and ponders Strine's next move

Breaking News: Chief Justice Leo Strine Stepping Down https://t.co/EhegYlpuaR

— Professor Bainbridge (@ProfBainbridge) July 8, 2019

She links Strine's resignation letter. https://t.co/vBrAtlIiou

— Professor Bainbridge (@ProfBainbridge) July 8, 2019

So the rumors were true. What's next? #Wachtell? Working with @JoeBiden campaign? Both? https://t.co/5yIJLvgc0V

— Jesse Fried (@jessefried) July 8, 2019

Sam Waltz of Delaware Business Times speculates CJ Leo Strine will spend a few years with a Wall Street firm (Del office?), sock away money to put sons through college, run for Governor in 2024. https://t.co/ZfC5VbqzQT

— Professor Bainbridge (@ProfBainbridge) July 8, 2019

Leo Strine, Delaware Supreme Court's Chief Justice, to step down https://t.co/RDOoUBfxpO via @delawareonline

— Ann Lipton (@AnnMLipton) July 8, 2019

🤐 https://t.co/NVTfktW06p

— Strine Says (@StrineSays) July 8, 2019

It’s hard to imagine the nation’s most important court for businesses without Strine’s extremely distinctive voice.

— Alison Frankel (@AlisonFrankel) July 8, 2019

SP500 ticking up after Strine announcement. Must be causal. pic.twitter.com/VeZOVpJtCb

— Andrew Baker (@Andrew___Baker) July 8, 2019

Breaking News: Chief Justice Leo Strine Stepping Down

Bloomberg Law reports:

Leo Strine, head of the Delaware Supreme Court, is stepping down after five years of leading the state’s sole appellate court that decides most of the highest-profile business disputes in the U.S.

Strine, 55, said in a statement he doesn’t have any immediate plans for after he retires. In the past, he’s taught about Delaware corporate law at institutions such as Harvard University, the University of California at Los Angeles and Yale University and churned out law-review articles on topics ranging from defining good-faith in corporate law and investor suits that generate more compensation for lawyers than shareholders.

I suspect Chief Justice Strine will follow so many of his recent predecessors into highly remunerative legal practice with some big Wall Street firm (he's got two sons to put through college) or, maybe more likely based on various hints he's dropped over the years, he may be planning a political career. But I would give just about anything to have him join the UCLA corporate law faculty. What a tremendous coup that would be!

Delaware Business Times Publisher Sam Waltz speculates:

First, people with his background and accomplishments make a huge personal financial sacrifice in serving on the bench, although it does advance their billing rates when they re-enter private practice.

It’s not out of the realm of the expected to anticipate that Chief Justice Strine could and would pull in $1 million a year, perhaps even more, in private practice. And part of the speculative reason is that he’s at the stage with young adults heading off to college, so his family would benefit from the change.

Beyond that, though, one or two speculated that he really wants to be governor one day, and a lucrative legal career would secure his family’s future for a return to public service in an elected role.

 

 

 

California Secretary Of State Issues First Board Gender Quota Report

Keith Paul Bishop reports a couple of oddities in the first report per SB 826:

Oddly missing from the list was any indication of the number of female directors (if any) even though the law clearly requires that information.  It is also unclear why the Secretary of State chose to publish address and telephone information when that information was not required to be in the report.

He also observes that:

First, the report does not disclose the number of subject corporations that have at least one female director for the reasons explained above.  Second, it does not identify any corporation that is in violation of the law.  The reason is that the law requires that subject corporations have a minimum of one female director no later than December 31, 2019.  Cal. Corp. Code § 301.3(a).  The statute further provides that a female director having a seat for at least a portion of the year will not be a violation.  Cal. Corp. Code § 301.3(e)(3).  

Chief Justice Leo Strine rehabilitates his Oracle decision

Ann Lipton analyzes the recent Delaware Supreme Court decision in Marchand v. Barnhill, "which is notable for two reasons.  First, it furthers the Court’s project of reinvigorating director independence standards, and second, it is one of the very few decisions to find that the plaintiffs properly pled a claim for Caremark violations."

As to the former, she observes that:

Starting with the issue of director independence, as Delaware-watchers are well-aware, in the past few years, the law has undergone something of a revolution.  Once upon a time, only clear financial ties or the equivalent of blood relations would be sufficient to show that one director lacked independence from another, but more recently, Delaware has begun to recognize how less concrete social and business ties, traveling in similar circles, ongoing professional and personal contacts, and so forth, can collectively create feelings of obligation that prevent one director from making an objective decision about whether to sue another.

Thus, in Marchand, the Court held that a particular director was likely biased in favor of Kruse because the Kruse family – not Paul Kruse personally – had mentored him throughout his business career, going so far as to make a sizeable donation to a local college that somehow ended up with the director in question getting a facility named after him.  Significantly, the Court emphasized that “independence” may vary depending on the type of decision at issue – directors may be willing to vote against close friends on some matters, but that’s a far cry from being willing to sue the friend for breach of duty, and judges need to be sensitive to the difference.

This entire line of caselaw might be described as Strine’s revenge: it’s a direction he recommended with In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003) when he was on the Chancery court, and that the Delaware Supreme Court rejected in Beam v. Stewart, 845 A.2d 1040 (Del. 2004).  Now in the Chief Justice spot, Strine has apparently persuaded his colleagues as to the correctness of his views and is moving full steam ahead, going so far in Marchand as to cite his Oracle decision, thus retroactively making it authoritative. 

 

Courts should not automatically pierce the veil of single shareholder corporations

Joshua Fershee analyzes a Hawaii case seeming to suggest that "sole ownership and control" was enough to justify veil piercing.

Lipton on Corwin and Controlling Shareholders

Lipton, Ann, After Corwin: Down the Controlling Shareholder Rabbit Hole (May 31, 2019). Vanderbilt Law Review, Forthcoming; Tulane Public Law Research Paper. Available at SSRN: https://ssrn.com/abstract=3397390

As Delaware has developed its doctrine with respect to controlling shareholders, its view of their relationship to directors has evolved over time. This evolution has produced some pronounced inconsistencies with respect to the weight placed on director approval of controlling shareholder action. The recent Delaware Supreme Court decisions in Corwin v. KKR Financial Holdings, Kahn v. M&F Worldwide, and C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust introduced further uncertainty into the mix by making the determination as to whether a transaction involves a controlling shareholder practically outcome-determinative of many shareholder disputes. If a controlling shareholder is present, there is the potential for close court examination to ensure fairness to the minority; if not, any shareholder challenge is likely to be dismissed without even the chance for discovery.

Yet even as the presence or absence of a controlling shareholder takes on heightened importance, changes in the business landscape have made controllers more difficult to identify. More companies are adopting multiclass capital structures both in public and private markets, and the popularity of management buyouts means that shareholders with significant stakes, ties to directors, and informational advantages are often placed across the bargaining table from companies themselves. The upshot is that courts are called upon to make early, critical judgments regarding levels of control in an increasingly complex corporate ecosystem.

This Essay, prepared for the Institute for Law & Economic Policy’s 25th Annual Symposium, maps the points of doctrinal divergence and proposes changes to the law that better align the concerns posed by controlling shareholders with the law’s treatment of them. In particular, this Essay argues that courts do not pay sufficient attention to the most salient fact about controlling shareholders: their immunity to the ordinary mechanisms of market discipline. To ensure that the presence of a controller is accurately identified and the appropriate level of scrutiny applied to its self-interested transactions, courts should focus not merely on the putative controller’s influence over the board, but on the mechanisms of self-help realistically available to the unaffiliated shareholders.

Recommended.

Tuch on Kershaw's The Foundations of Anglo-American Corporate Fiduciary Law

Tuch, Andrew F., Review of David Kershaw, The Foundations of Anglo-American Corporate Fiduciary Law (May 16, 2019). 78(1) Cambridge Law Journal 210 (2019). Available at SSRN: https://ssrn.com/abstract=3389482 or http://dx.doi.org/10.2139/ssrn.3389482

How does legal doctrine form, why does it change, and why do doctrines with a common starting point, in legal systems with a shared heritage, diverge? This essay reviews and critiques a book by David Kershaw that addresses these questions. The book charts the evolution of corporate fiduciary law in the United Kingdom and United States and, comparing the two systems, explains how and why the respective legal regimes evolved as they did. Kershaw weighs in on contested U.S. scholarly debates, confronting the common claim that doctrinal change is less the product of internal logic or strict precedent than a response to extra-legal factors, including interest group politics, policy concerns, and state competition for corporate charters. Kershaw rejects this claim, offering other, provocative accounts for the production of U.S. corporate fiduciary law and for Delaware’s lead in attracting incorporations.

Memo to self: I need to write about the new Blue Bell case

Thread. #corpgov #corporategovernance #corporatelaw https://t.co/FHbKRuYovB

— Professor Bainbridge (@ProfBainbridge) June 19, 2019

#StrineSays: “When...a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the co’s business operation, that supports an inference the board has not made the good faith effort that Caremark requires.” https://t.co/Cp3tQ9GgoL

— Strine Says (@StrineSays) June 20, 2019

“[T]hat Blue Bell nominally complied with FDA regulations does not imply that the **board** implemented a system to monitor food safety **at the board level**.”

— Strine Says (@StrineSays) June 20, 2019